The main thing that saved us from a total economic meltdown in 2008 was a very robust banking system. Amid all the silliness going on in the rest of the world, our banks still insisted on 20% deposits for home buyers (smaller deposits were allowed but in restricted numbers), giving themselves comfortable margins if house prices fell. Our banks also looked as hard as ever at business borrowing, generally erring on the side of caution in a very lassez-faire borrowing world everywhere else. You may find the banks can be nit-picking and over-cautious at times, but it is much better than a collapsed banking system.
Never forget, though, that banks are businesses, mostly owned by shareholders. Yes, they often make large profits, but they too need to understand the concept of saving for a rainy day. It is almost certain that their reserves are going to be depleted this year, and possibly for some time to come. Never mind. The chairman of Westpac has recently emailed all shareholders to emphasise the robustness of the bank, even in these difficult times. We can be reassured that the banking system will see us through another crisis.
However, this is not enough for some people. Geoff Simmons, purportedly an economist, and the current leader of the virtually extinct Opportunities Party, thinks that banks should give away all their profits, thus risking their own demise, by not charging interest during mortgage holidays.
New Zealand banks should use their profits to write-off the interest accrued while borrowers are on mortgage holidays, one economist says.
Geoff Simmons, who is also leader of The Opportunities Party, welcomed the Reserve Bank call for banks not to pay dividends to shareholders until the economy recovered from the hit of Covid-19.
But he said they needed to go further and use any profit they made this year to pay the interest that homeowners were charged while on repayment holidays.
Banks are not doing anything special in offering up to 6 months mortgage holidays, as it is within their policy framework to do so, although the large number of homeowners applying for the concession at the moment is likely to cause a significant reduction in income and repayment of capital for some time to come.
Banks have agreed with the Government to offer borrowers six-month breaks from repayments if they suffer an income blow from Covid-19. But interest still adds up over this period so the loan becomes more expensive overall.
Of course it does. That might be because the banks have to borrow money to fund mortgages, and they are required to make both interest and principal payments on those loans, just like everyone else. Obviously, concessions are being made everywhere at the moment, but banks are not charities, and they will be using up reserves of cash at present to fund their way out of this crisis.
Simmons said it was not a true holiday. “More like one where there’s emails piling up while you’re sitting on the beach.
Which is exactly what happens on a true holiday for most of us…
“Based on previous years’ results, if the banks decided to forego their profits for a year, they could afford to give all New Zealanders a three-month interest holiday. This would be a real holiday – one where that debt isn’t waiting for you, or compounding and getting worse, over the life of a mortgage. That may not solve our impending economic spasm, but it’ll sure give every Kiwi homeowner a fighting chance.
…and it will leave our banks in a precarious position if this crisis goes on for longer than expected, which is likely. The economic effects of this situation will be felt for some time, and it isn’t just mortgage holders that the banks need to worry about. They also have to prop up struggling businesses as well.
“With the banks providing a true mortgage holiday, the Government could mandate that landlords pass this benefit on to renters so that they could have a rent holiday. Not only would it not hurt the underlying fundamentals of the Australian banks, it would show a gesture of goodwill that we are all in this together.
“These are unprecedented times and unprecedented measures. The Government has provided a welcome wage subsidy package. We need banks to show their commitment to the New Zealand public by providing real, much needed, financial relief.”
The banks are giving much needed financial relief. It is called a mortgage holiday. They are deferring their interest receipts on loans, in some cases for years.
The best piece of advice you can give to any business at this point in time is to try not to run out of cash. Well managed business already do this, and those that are already going to the wall after just a week of lockdown were obviously not well managed businesses, unless they are in tourism. I am very glad of our robust banking system and glad they have cash reserves at a time like this, because they will need them. It gives me a bit of confidence that we can survive this.
What a shame an aspiring politician and so called economist cannot think more sensibly. It just proves that The Opportunities Party thinks that money grows on trees. It doesn’t.
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